SERVICES PMIs
S&P Global: Service sector growth reaches four-month high in June as sales gathered modest momentum
The headline S&P Global US Services PMI® Business Activity Index rose to 51.2 in June from 50.7 in May. Although the latest reading signaled growth for the third month running, it was consistent with only a modest increase in activity and remained below the average seen since the pandemic.
New orders growth accelerated from the previous month. Panelists reported that new project wins and increased demand related to the FIFA World Cup helped lift new business inflows at the fastest pace since February. Domestic demand remained the main driver of growth, as overall new export business declined for a seventh successive month, the latter largely blamed on uncertainty around government policy and tariffs.
Historically muted business conditions continued to discourage firms from adding to staffing numbers, with a net loss of jobs reported for the third time in four months. Anecdotal evidence indicated that the non-replacement of voluntary leavers also led to the decline in employment. Nonetheless, capacity pressures intensified, as US service providers registered a sixteenth successive monthly accumulation of outstanding business in June. Some companies also cited supply chain disruption and extended project lead times as factors behind the rise in backlogs.
Meanwhile, services companies reported that labor-related expenses contributed to higher operating costs in June. Tariffs and higher fuel prices were also key drivers of cost increases during the latest survey period. Overall input costs rose sharply, though the rate of inflation eased to its weakest since February. In response, selling price inflation was little changed from May, but remained historically elevated.
Looking ahead, US services companies were positive about activity levels over the coming year, with optimism strengthening from May. Hopes of improved economic conditions and easing price pressures supported sentiment, while some firms also cited new project launches and expanded marketing strategies. As a result, confidence reached its highest since February.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence
“A slight acceleration of business growth in the services economy takes the expansion to the strongest since the outbreak of the war in the Middle East, though the pace of growth remains lacklustre compared to that seen at the start of the year before the conflict. The survey data are hence broadly indicative of the economy only growing at a 1.2% annualized rate over the second quarter.
“Similarly, while business growth expectations for the year ahead improved in June, they remained subdued compared to that seen prior to the war as businesses lack clarity over the outlook, both from economic and geopolitical contexts. The prospect of higher interest rates also acted as a further headwind to growth, notably in the financial service sector, where business expectations remain especially muted.
“A key underlying factor behind the relatively subdued performance of the services economy was again elevated price pressures. Although easing slightly, aided largely by lower oil prices, costs continued to rise at a steep rate in June, driving up rates levied for services. Customer push-back against these high prices was again widely reported, most notably in consumer-facing businesses. Consumer-facing companies are nevertheless reporting that further price falls should help stimulate sales in the months ahead, providing a ray of hope for both the growth and inflation outlooks.”
ISM:
In June, the Services PMI registered 54 percent, a decrease of 0.5 percentage point compared to May’s figure of 54.5 percent.
The Business Activity Index remained in expansion territory in June, decreasing 2.3 percentage points to 55.4 percent from May’s reading of 57.7 percent.
The New Orders Index registered 55.1 percent, 2.2 percentage points below May’s figure of 57.3 percent.
The New Export Orders remained at 50 percent or above for the fifth month in a row, increasing 0.4 percentage point in June, to 50.4 percent.
The Imports Index dropped into contraction territory at 49.4 percent in June, a decrease of 1.7 percentage points compared to its May reading of 51.1 percent, and its third consecutive lower reading since reaching 55.2 percent in March.
The Employment Index expanded for the first time in four months with a reading of 51.2 percent, a 3.3-percentage point increase from the 47.9 percent recorded in May.
All of the four subindexes that make up the composite PMI® were above their 12-month moving averages.
The Prices Index decreased to 67.7 percent in June, 3.6 percentage points below May’s figure of 71.3 percent and its first time below 70 percent since February. The index has exceeded 60 percent for 19 straight months, maintaining its 12-month average of 68 percent.
Respondents in June commented less frequently about pricing impacts on petroleum products, while tariff impacts continued to be a theme for increased pricing pressure.
Fourteen industries reported growth in June, three less than in May, and the number reporting contraction were four, an increase of three from May.
- “We continue to experience higher prices due to the Persian Gulf conflict through rising diesel fuel costs and increased input costs for resin-based packaging. The brunt of the impact will be experienced in the third quarter (Q3) of 2026, but we are feeling the impact now. Suppliers are aggressively attempting to pass through price increases.” [Accommodation & Food Services]
- “Extreme drought in Virginia is creating financial problems for farmers and the agricultural industry. Dramatically reduced spring crops harvest has created significant cost increases in feed expense. The barley grain crop was nearly totally lost due to the early hot weather and spring freeze. High fertilizer cost increases due to the war in Iran and increased freight cost has driven cost for crops above breakeven levels on many farms. Many dairy farmers are struggling with crop shortages, high input cost and below milk price breakeven. The financial stress from higher cost due to the Iran war and drought-related forage losses has resulted in decreased spending in the agricultural sector.” [Agriculture, Forestry, Fishing & Hunting]
- “In general, our company (commercial construction) is doing well. Pipeline is healthy for current and future work. Material pricing is higher and lead times on certain components in support of data center piping is elongating.” [Construction]
- “In addition to the known semiconductor manufacturing issue, now there are concerns regarding memory availability that is materially impacting our OEM’s purchasing patterns, which is affecting availability and driving my company’s purchasing decisions, including how much longer we are sweating our assets, how frequently we refresh, and how we approach maintenance contracts.” [Finance & Insurance]
- “Despite economic headwinds like persistent inflation, patient volumes and overall business activity remain strong reflected mainly by outstanding revenue performance. Supply chains remain resilient as well; back orders are at a historical low, and few if any critical products are experiencing difficulties. Labor is steady, as we continue to add full-time workers while the forecast remains positive. Given the continuation of the conflict in the Middle East, we are beginning to hear that cost of goods increases are on the horizon but have yet to materialize. Cost increases are in focus for the next quarter.” [Health Care & Social Assistance]
- “From a strategic supply chain perspective, we are seeing increased complexity in managing total landed cost due to tariffs, import/export constraints and duty recovery mechanisms, requiring more proactive coordination across sourcing, logistics and compliance teams. Recent discussions internally also highlight the impact of tariff programs and duty drawback evaluations on purchasing strategies.” [Mining]
- “Demand remains strong in infrastructure, environmental, and resilience projects, while procurement faces persistent labor inflation, supplier capacity constraints, and regulatory complexity—particularly in California and other high-cost markets. Labor-driven categories remain elevated despite easing goods inflation. The impact is higher rates, longer lead times, and increased importance of capacity assurance vs. lowest-cost sourcing.” [Professional, Scientific & Technical Services]
- “Business has been very strong during what is usually a less active time of the year. Pricing is stable, and employment just where we want it to be. Supply chain strong with no challenges.” [Retail Trade]
- “The utility industry continues to experience extended lead times, supply-chain constraints, material shortages, and pricing volatility. As a result, suppliers are often limiting quotation validity periods, with many RFQs carrying expiration dates as short as 24 hours. These conditions require timely evaluation and procurement decisions to mitigate the risk of price changes and availability issues.” [Utilities]
- “We are experiencing continued sequential top-line growth driven mostly by increased prices.” [Wholesale Trade]
Walmart Lowers Prices on Thousands of Items, Including Beef and Coca-Cola The largest U.S. grocer wins praise from President Trump for the move
Walmart is cutting prices on thousands of items to help customers with affordability after years of inflation.
The largest U.S. grocer said Monday it is lowering the price of ground beef by 12%. The price of cherries is being halved. A 24-pack of Coca-Cola is falling by one-third to $9.97. The company also said it is cutting prices on household products, toys, apparel and other products. (…)
Walmart has long emphasized lower prices as part of its marketing, but in recent months, affordability has become a hot-button issue in American politics. Behind the scenes, Walmart has emphasized to federal officials that policies that help the retailer control costs and keep consumers spending, such as lower tariffs and gasoline prices, will help improve affordability for American shoppers because of Walmart’s scale, said a person familiar with the situation.
Walmart’s actions follow a number of attempts by the Trump administration to rein in record-high beef prices, which have become the poster child of food inflation in the U.S. over the past year. Ground-beef prices were up 12% in May from a year earlier, according to the Labor Department.
Last week, the Trump administration also pledged as much as $500 million to small and midsize meatpacking companies to keep their cattle-slaughter processing volumes at a certain level. Processing cattle is unprofitable for meatpackers currently because of high livestock prices.
In recent months, Trump has also directed some of his top advisers, such as Peter Navarro and Stephen Miller, to find ways to lower prices. The Justice Department launched a probe into the four largest U.S. meatpackers after Trump requested one in a social-media post.
In May, the Trump administration delayed plans to address high beef prices by suspending tariffs on imported beef. The delay followed outcry from some congressional Republicans and cattle ranchers after The Wall Street Journal reported Trump’s plans.
Certainly not a sign of strong demand. CPI-Food-at-Home has not inflated more than 3.0% YoY since July 2023 (currently 2.7%). Apparel inflation took off last February and is now 4.8%.
Will Someone Finally Blink in the AI Spending War? If Meta does rent out excess compute, it could signal that big tech has overbuilt
(…) there are also some signs that AI’s big spenders are looking for more ways to at least rationalize their investments. Before SpaceX went public last month, its xAI business signed a major deal to effectively share its computing capacity with Anthropic—for $1.25 billion a month.
SpaceX hasn’t typically been counted among the “hyperscale” tech firms so named for their computing networks. But Elon Musk’s rocket company spent $12.7 billion in capital expenditures on its AI division last year—triple what it spent on the rocket business—and analysts expect more than $37 billion to go out the door this year to that aim, according to Visible Alpha.
Now Meta may be getting in on that action. Bloomberg reported last week that the social-network giant is developing a cloud-computing business using the extensive AI network it has built out.
(…) Bernstein Research analyst Madison Rezaei says the scale of Meta’s network already “easily rivals cloud provider footprints.” She estimates the company has about 20 gigawatts of computing capacity now with an additional 14GW coming online over the next few years.
Renting out some of that capacity would effectively confirm that Meta has overshot in its build-out. (…)
The big question would be whether renting out excess capacity is a short-term offset to continued mega-spending, or a sign that such spending is about to recede. Meta is a smaller company than Amazon, Microsoft and Google, but it has been the most ambitious in its AI investments. Zuckerberg has built up a division called Meta Superintelligence Labs in a push for the social network to be the first to develop a supercharged form of AI. Meta expects to spend well over half its revenue this year on capital investments, which will likely take its free cash flow into negative territory for the first time in its life as a public company.
The prospect of any of the megacap tech giants scaling back their AI capex is a worrisome one for tech investors broadly. AI spending has pumped up the business of chip companies, makers of servers and other tech hardware as well as producers of memory chips and data storage systems. That in turn has sharply boosted their relevance to the market at large. The chip companies alone in the S&P 500 now make up about 18% of the blue chip index’s total market cap compared with about 5% five years ago, according to data from S&P Global Market Intelligence.
Most analysts doubt that Meta plans to actually scale back its spending. “Meta is not stepping away from the AI race; it is turning early, aggressive capacity commitments into a strategic value creation option,” wrote Brent Thill of Jefferies. Still, the idea that the company has excess capacity at this stage of its AI cycle raises eyebrows. Justin Patterson of KeyBanc Capital said “it is conceivable that the scope of MSL’s ambitions have narrowed vs. Meta’s original AI goals when it began the capex cycle.”
In any case, investors who have been watching the AI investment cycle closely aren’t taking many chances. AI-exposed stocks fell hard after the Bloomberg report, with the PHLX Semiconductor Index sliding 11% over a two-day period as major chip names like Nvidia, Broadcom, Advanced Micro Devices and Intel have all fallen. Memory companies have fared even worse; SK Hynix and Micron each lost 17% and 15%, respectively, in that time. Broad selling across tech cost the Nasdaq nearly 2 percentage points over two days. Caterpillar, the second-largest Dow industrials component with a business selling generators for data centers, shed 10% over a two-day period.
The coming round of earnings reports will give the four so-called hyperscale companies a chance to signal future spending intentions. Based on their own prior projections, combined capital expenditures by Google, Amazon, Meta and Microsoft is expected to hit $710 billion this year. But even taking that to an astounding $1 trillion in 2027 would represent a growth rate of nearly half of what’s expected this year.
Investor euphoria for the AI spending race could be tripped up simply by the law of very large numbers.
The truth is that both SpaceX and Meta found themselves with excess compute capacity after their respective LLMs (Grok and Llama) can’t compete with Anthropic, OpenAi and Google. Their saving grace is that compute demand is so strong that it was easy for them to lease their excess capacity. This is increased short-term supply that fills a critical void as demand is exploding. It reduces demand for datacenters but only at the tail end of the curve, in the 2030s.
Bloomberg’s Parmy Olsen explains it well in Zuckerberg and Musk’s AI Failure Club Has Its Perks.
If you missed it, yesterday’s Daily Edge discussed the trends in compute/power demand.
AI Productivity Gains Are Years Away, Deutsche Bank’s Reid Says
Artificial intelligence is likely to enhance productivity signficantly but any such impact on economies may still be years away, Deutsche Bank analyst Jim Reid said.
In an interview with Bloomberg Television, the economic historian who is global head of macro and thematic research at the German lender’s research institute said he’s “excited” about the technology’s promise, and predicted it will create jobs in the long run.
“In my career I haven’t seen anything like AI in terms of potential for productivity,” Reid told Anna Edwards on Tuesday. “But I would probably caution that going to take a number of years for us to properly embed it into enterprises to really get the benefits of that.” (…)
More generally, Reid reckons the technology will prove work-enhancing.
“My view on AI and jobs is slightly skewed by what economic history tells us,” he said. “At every point of a new breakthrough in innovation, we’ve been really scared about jobs, about new technology destroying jobs, and it has never happened in aggregate.” (…)
- Have We Entered an Era of High Productivity Growth?
From The San Fran Fed:
(…) incoming data has been mixed so far. For example, labor productivity—which measures output per hour of work—has shown solid gains in recent years.
Meanwhile, another popular measure of productivity that adjusts for how much equipment, technology, and other resources workers have at their disposal—the San Francisco Fed’s Total Factor Productivity (TFP) index—has shown relatively modest growth over the same period. (…)
The computer and internet boom of the 1990s can serve as a useful historical parallel for understanding what might lie ahead. Figure 3 shows the changes in labor productivity and TFP relative to 1994 levels.
Both measures moved closely together at first, similar to the trend shown in Figure 1. Starting around mid-1996, labor productivity began accelerating more rapidly than TFP, similar to the diverging pattern we observe today. This divergence suggests the current moment may resemble the early stages of the 1990s technology boom, when the full productivity benefits had not yet materialized in overall data but were reflected in business investment decisions. (…)
Our analysis in this Letter indicates that the current data on productivity do not yet provide definitive evidence that the U.S. economy has entered a period of high productivity growth. The divergence between strong labor productivity growth and more modest TFP growth suggests that recent investments related to AI might be making workers more productive by providing them with better tools, such as new software and expanded computing capacity, but broader efficiency gains remain unrealized so far.
Nonetheless, our regime-switching statistical model is responding to incoming data similarly to how it would have in the mid-1990s. This provides some reason for cautious optimism that the U.S. economy could be starting to experience a period of sustained high productivity growth.
FYI:
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Consensus forecasts S&P 500 EPS growth of 22% in Q2, although the strength remains concentrated, with AI infrastructure companies expected to account for nearly 60% of total EPS growth. The median S&P 500 stock is expected to grow EPS by 9% y/y.
- Interesting that “risk appetite” has remained generally positive since the pandemic. Retail investors?
- The Financial Times political polling now finds that President Trump’s approval rating in June fell -2 points to just 36%. Among Independents, the approval rating sagged a huge -8 points to a mere 21%. With respect to November’s midterms, the Democrats now command a 6-point lead over the GOP — 44% to 38% support. The lead builds on a 4-point lead a month ago. These results were prior to the release of the President’s financial winnings, which
showed an incredible $2.2 billion intake last year, at a time when many Americans are struggling, and the low-end is living paycheck to paycheck. - US Loses to Belgium in World Cup Match Marred by Controversy
This is really funny (thanks David)
